The growth of the global private equity industry over the last 10 years suggests investors remain bullish on private equity firms’ ability to assess acquisition targets; assets under management have increased 2½ times between 2006 and 2016 despite the Great Recession. Yet data indicates PE firms are not assessing the CEOs who run their portfolio firms with the same rigor. Research by Bain & Company found PE firms replaced nearly half the CEOs of the companies that they owned. What’s more, in 60% of those instances, the PE firm didn’t expect to replace the CEO when it bought the firm. And in the clear majority of those cases, the PE firm didn’t change the CEO until “after the all-important first year of ownership – after the honeymoon period had ended and the opportunity to build early forward momentum had passed.”

By too often keeping or hiring the wrong CEOs, PE firms are leaving growth opportunities on the table. Why does this happen? Over the past eight years, we evaluated 181 leaders of PE-backed companies. As part of these evaluations, we conducted structured interviews with over 2,000 executives who worked with, for or over them. We also added these evaluations to an extensive database to see trends in traits of the best leaders – the characteristics the top performers have in common. Our research and experience in helping PE executives evaluate and develop CEOs and members of their senior management teams indicate that PE firms frequently evaluate CEOs or CEO candidates on the wrong criteria. We have identified three skills that separate the best-regarded leaders from the rest.